Will rising interest rates, falling supply put damper on construction industry?

“Basically, we’ve had just a super rosy environment over the last three years.. From a development standpoint, it couldn’t have gotten much better.  When your biggest challenge is the happy trouble of trying to get materials, that’s a pretty good day,”  said Joe Downs, executive vice president and general manager, The Opus Group.

Downs was the featured speaker at last Friday’s monthly breakfast meeting hosted by CCIM Kansas City.

But, Downs said, the rosy environment has quickly changed with the rise of interest rates.

“It’s just a different environment, and it’s hard to reconcile because the supply and demand metrics seem so great.  The third quarter reports that the brokerage shops just issued, they’re phenomenal.  Another 2.5 million SF of warehouse absorption and record construction.  These are all deals that started before the last six months.  Things have changed really fast, really drastically,” he said.

“What we’re sensing and experiencing is that demand is still out there.  It’s hard to tell if that demand is today’s board level decisions or six or nine months ago board level decisions, but it’s still there,” said Downs.

He said that all of Opus’ properties that are unencumbered by leases are still experiencing strong prospect activity.

Downs predicts that the interest rate environment will start to put a damper on new supply.

“I think you’re going to start to see supply slowing down. . . . I think everyone is busy right now, but that pipeline for 6, 12, 18 months is a little less certain,” he said. 

Downs said it is getting harder and harder for developers to get construction loans as interest rates rise. 

“Lead times on materials are drastically different.  We just got a precast quote in Kansas City.  What was a 14 or 15 month lead time is now 6 months, 7 months so you can tell there’s early signs of [a slowdown in] the construction industry,” he said.

Downs said there is a sense that construction costs, which have risen steadily in the past three years, are starting to modulate, but it is too early to be certain.

“We’re sensing that costs are modulating.  Certainly some of the supply chain items are getting worked out.  It’s just going to take time, about 18 months, until we really know,” he said.

Values also have risen greatly in recent years.  Downs said values are approximately 150 percent of what they were just four years ago.  However, he said those values are starting to fall. 

Downs said rent is the only toggle left to pick up the slack created by rising costs and dropping values.

Downs said tenants currently are willing to pay increased rents.

“I would say in the last several months, we’re talking about 10, 15, in some places 20 percent rent growth from what we were quoting in the first quarter.  It’s just necessary to overcome what I was talking about on value and costs.  So things are still moving along, but it’s just a much more variable environment right now,” he said.

Downs said it’s a great time for the unlevered buyer.

Opus, which will celebrate its 70th year in business next year, has been active in the Kansas City market for more than 20 years.  Downs said Opus has built more than 30 buildings in the market.

He discussed some of its recent projects which include Westley on Broadway, a 256-unit mixed-use multifamily apartment building in Westport, which was delivered during COVID and is fully leased.

“It is super rare to get 1.7 acres in an urban environment.  Usually, we’re dealing on half an acre.  To be able to spread out like this and really create an asset of size and scale is significant,” Downs said.

Currently under construction is Briarcliff Apartments, another 256-unit mixed-use apartment project which Downs said will deliver in mid-2023.

Opus also currently is constructing Liberty Heartland Logistics Center, a five-building industrial project located in Liberty near I-35 and Highway 69.  Downs said Hallmark Cards, Inc. will anchor the project and take occupancy of an 850,000 SF build-to-suit distribution facility early next year. 

Downs said deals in the foreseeable future are likely to be more modest and very understandable.

“We’re very focused on understandable deals that are more simple and modest in nature and size to meet the demand and the great locations.  It’s kind of what you do when things are less clear around you,” he said. 

Opus' mixed-use poised to trigger Westport Road redevelopment

The Opus Group's new six-story mixed-use apartment project at the corner of Westport Road and Broadway Boulevard is expected to serve as a catalyst for neighborhood redevelopment along Westport Road between Broadway and Main Street. 

Although it won't be completed until the spring of 2020, the 254-unit multifamily project with 10,000 square feet of ground-level retail already is attracting tenant interest.

"Westport hasn't seen a project of this size in 50 years. This redevelopment will revitalize the neighborhood," said Chris Kamberis, a Kansas City-based commercial developer who owns property adjacent to the multifamily project and is seeking tenants to add to the unique neighborhood feel and expansion.

With plans in the works to extend the Kansas City Streetcar to Westport, Kamberis added, the OPUS multifamily project is right on time.

"With the addition of OPUS' mixed-use apartment complex and new tenants, Westport will continue to be an attraction for both locals and city visitors," said Kamberis, owner and president of CTK Real Estate.

The Opus Group began construction of the mixed-use project this fall. Opus Development Company, LLC is the developer in partnership with CTK Real Estate; Opus Design Build, LLC is the design-builder; and Opus AE Group, LLC is the interior designer, architect and structural engineer of record. Financing for the project is provided by Central Bank of the Midwest.

Delaware Street Project developer adds Plexpod, promises more announcements

The addition of co-working concept Plexpod to the Delaware Street Project in the River Market is central to Epoch Developments’ overall strategy as it builds a walkable, creative district along the KC Streetcar line just north of I-70.

“Plexpod’s unique collaborative co-working community is exactly the type of tenant we’re hoping to attract,” Epoch Developments Founder Craig Slawson explained. “You can’t just lay products on the table and expect someone to be sucked into the space. You have to have something interesting to help curate a better experience for everyone.”

Co-working is one leg of a three-legged stool required for successful community activation and livelihood, according to Slawson, who lives in Denver but has long-standing family ties to the River Market area. The other legs of the stool are bars/restaurants and merchants.

Epoch owns 10 of the 18 street-facing buildings on historic Delaware Street and is about halfway through the redevelopment process. Slawson expects to make several new announcements by the end of the year-including an occupant for a streetcar donated by the City and tenants for existing storefront space and new construction.

Plexpod's new 8,000+ square foot space located on the first and second floors of 510 Delaware will open in December and be the company's fourth metro-area location, according to a release. 

“We see River Market and namely Delaware Street as one of the leading emerging hot spots of amenities, which is ideal for our Plexpod member community,” said Gerald Smith, founder and CEO. "This new facility will be another great collaboration location for Plexpod member-companies across the metro to access and enjoy.”   

Plexpod facilities in The Crossroads, Westport and Lenexa offer 16 types of work styles ranging from open desks and collaborative workspaces to private offices and team spaces. The concept features meeting rooms, photography studios and performance theaters as well as personal amenities including outdoor space, social events and fitness options.